Protecting Taxpayers

In Debate Between Origin v. Destination Based Sourcing Rules The Marketplace Fairness Act Gets It Right

The Internet’s proliferation has dramatically transformed the way we work, communicate and even shop. In fact, by the end of 2013, online shopping will consume 9 percent of total U.S. retail sales, generating $250 billion in industry revenue.

Some of this growth is attributable to as much as a 10 percent market advantage the federal government has given e-commerce over its brick-and-mortar counterparts. This is not a market driven advantage, but simply a federal government-inferred subsidy.

Due to an out-of-date Supreme Court ruling, online retailers without an actual brick-and-mortar store don’t need to collect sales taxes. Don’t be mistaken: online sales are not tax-free. In most places, consumers are responsible for calculating and remitting them themselves; states are merely barred from utilizing their means of effectively collecting it – unless Congress acts.

A strong piece of legislation has been put forth in the House and Senate- the Marketplace Fairness Act – that empowers states to have online retailers collect sales taxes like brick-and-mortar stores, if those states choose to do so. Many on the right agree something needs to be done.

The late William Buckley, Founder of National Review, stated:

“If the advantage of tax-free Internet commerce marginally closes out local industry, reforms are required.”

Governor of Indiana Mike Pence also argued:

“I don’t think Congress should be in the business of picking winners and losers. Inaction by Congress today results in a system today that does pick winners and losers.”

There is a growing consensus that congressional action is needed, so the debate that has emerged is centered around what approach to take.

The Marketplace Fairness Act correctly uses what’s called a “destination-based” sourcing rule. In other words, customers will pay the sales tax that is due where they live. In contrast, an “origin-based” sourcing rule, to which some “taxpayer advocacy organizations” have lent their support, would ask customers to pay the sales tax that is due in the online retailer’s state of operation.

The origin-based sourcing rule, however, is flawed at its core, as it fundamentally fails to protect the actual taxpayer.

According to the Washington State Department of Revenue: “Businesses making retail sales in Washington collect sales tax from their customer” [emphasis added]. Like in all states, Washington charges sales tax on the consumer, not the business – retailers simply collect the taxes on behalf of their patrons.

In this way, an origin-based sourcing rule gets it backwards and endorses taxation without representation, giving out-of-state consumers no political recourse in a state to which they pay sales tax. There’s a sure temptation there for lawmakers.

If legislatures can force individuals who aren’t able to vote them out of office to fund better or new services for their constituents, there’s a pretty good chance we’ll see tax increases for online products purchased by out-of-state consumers. If you live in a Red State, which presumably many here do, then under the alternative “origin-based” approach, you would pay sales tax to a Blue State (think: NY, CA, IL, WA).

A destination-based sourcing rule, on the other hand, would empower taxpayers, ensuring they will only pay sales taxes in a state where they have a political voice and the opportunity to benefit from the services those taxes fund.

It also means that individuals who choose to live in sales-tax-free states, like Alaska, New Hampshire, Delaware, Montana and Oregon, will not be asked to begin paying sales taxes on purchases they make online. After all, the Internet sales tax reform debate began out of a need to level the playing field. Forcing Delaware citizens to pay more for online purchases to pay for services in New York City only tilts the government-mandated market advantage to the other side.

Conservatives have long championed taxpayer-rights initiatives. The Marketplace Fairness Act’s destination-based sourcing rule is a taxpayer-centric model that protects citizens, empowers consumers and ultimately levels the playing field so retailers – both brick-and-mortar and online shops – can operate in a free market.